The Latest In Financial Advisor #FinTech (June 2017)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Robo-Advisors Pivoting Towards More Human Advisors, And More Affluent Clients. Earlier this year, the original robo-advisor Betterment made the stunning pivot away from a “pure” robo solution, launching Betterment Plus and Premium tiers that would offer access to human CFP professionals, in addition to the Betterment technology itself. Now, as Betterment reaches its 7-year anniversary, the company is introducing a “new look” intended to make it look and feel less like an “upstart” and more like an established player… one that can attract more affluent investors (after the company raised its fees on its most affluent clientele by 66% earlier this year, from 15bps to 25bps). And as Betterment continues to pivot upmarket, it has also indicated it may start offering a wider range of investments, including access to more alternative investments. Notably, though, these pivots aren’t unique to Betterment. Sallie Krawcheck’s “robo-advisor-for-women” platform Ellevest has also quietly rolled out “Ellevest Prime”, hiring human financial advisors who will provide personal financial planning advice to affluent Ellevest clients, who will pay an advisory fee that starts at 0.90% with a $500,000 minimum. And student loan refinancing platform SoFi also announced a launch into wealth management, again by adding human financial planners to offer advice to the above-average-income upwardly mobile customers already using the SoFi platform. In other words, both leading and newcomer robo-advisors are no longer focusing on being a technology-based investment solution for Millennials… they’re becoming tech-augmented human “cyborg” advice platforms that are raising their prices, expanding their product line and service offerings, and trying to serve an increasingly affluent clientele regardless of generation. Just like every other financial services firm in the crowded marketplace.

“Upstart” Robo Platform Prumentum Takes 40% Stake In Legacy $3.6B Independent RIA PlanCorp! One of the fundamental challenges for most robo-advisors is that at their start, they’re unknown and therefore un-trusted brands, which leads to higher client acquisition costs (to establish a brand and overcome the trust barrier) that can and has buried many robo-advisors in their nascent stages. As a result, I’ve long noted the irony that so many robo-advisors take their $10s of millions of venture capital, and instead of investing into (and building upon) an existing RIA that already has a strong brand and existing asset (and revenue base), they continue to try to build from scratch. Well, now a new robo-advisor has crossed the line, as Prumentum announced that it has raised $25M in venture funding, and is using the proceeds to buy a 40% stake in PlanCorp, a life-planning-oriented independent RIA in the St. Louis area with $3.6B in AUM (with an option to buy the remaining 60% of shares in the future as well). Prumentum’s vision is to pair together (and scale up) the existing human-advisor capabilities of PlanCorp, with an account-aggregation-based “robo” platform it’s been building called BrightPlan, effectively using the technology to scale up (and expand the reach) of PlanCorp’s historically-high-net-worth clientele. The acquisition is important, in many ways – first and foremost, it’s the first time a robo-advisor has tried to enter the market by scaling up an existing and already-profitable firm, rather than trying to acquire clients and build a brand from scratch. Second, it’s potentially a far more effective way for “robo” technology to be monetized, in a world where financial advisors will only pay “so much” for technology solutions from their available budget for overhead, but a technology solution that buys an RIA and then powers margin expansion in that RIA (through its technology) can even-more-rapidly generate enterprise value (at least for a sizable RIA). And for large independent advisory firms looking for ways to exit, or to attract growth capital, the idea of technology firms buying RIAs is an entirely new channel of potential M&A activity with unique strategic value opportunities.

Blooom Eliminates Enterprise Solution, Pivots Solely B2C. In a world where most “robo-advisor” platforms are struggling to gain and sustain traction in the B2C marketplace, leading to the rollout of human advice solutions, pivots to work with financial advisors, or both, Blooom is unique in recently announcing that it was eliminating its division to offer services via enterprise channels (in their case, employer retirement plan sponsors), and instead focus purely on its B2C offering. For those who aren’t familiar, Blooom is unique even in the robo-advisor space, in that the company doesn’t require consumers to move or consolidate assets with them; instead, Blooom serves as an overlay on top of existing employer retirement plans, obtaining 401(k) and 403(b) login credentials and using them to analyze and make improvements to existing investment selections, monitor the accounts over time, and conduct periodic rebalancing, with a simple pricing structure of $10/month per account. Earlier this year, Blooom announced a $9B Series B round, and that at the time it already had 6,000 clients (with a goal of 10X growth this year), and has noted now just two months later that it’s already up to 7,500 clients. Notably, other “robo” platforms have tried the approach of overlaying analytics on other platforms, but without actually taking discretionary control (e.g., Jemstep); Blooom seems to have figured out that the real secret was not just using account aggregation and login credentials to analyze outside accounts, but using the technology to actually (automate) trading those accounts, which effectively allows Blooom to get paid to manage retirement accounts while reducing buyer friction by eliminating any need to move or consolidate those accounts first (which is especially important when managing employer retirement plan dollars, which may not be available to move in the first place!).

Morningstar Is Building Its Own Financial Planning Software? A growing number of financial services platforms are trying to create a “holistic” financial technology stack, blending together both investment (portfolio accounting and trading), financial planning (advice and engagement), and client relationship management (CRM) tools. Yet with Envestnet purchasing FinanceLogix, and Fidelity buying eMoney Advisor, there are suddenly very few established financial planning software companies even available on the market (though Advicent is reportedly still up for sale). For a company like Morningstar, which is increasingly expanding from “just” its data-and-research-service roots into a provider of various investment solutions and technology, the lack of financial planning software has been a substantial gap in its offering as the entire industry shifts from an investment-centric value proposition to an advice-centric one instead. But now, there’s a public indication that Morningstar is working on some kind of financial planning software solution, with a job opportunity on LinkedIn for a “Senior Quantitative Analyst, Financial Planning Methodology”. Notably, the position would entail building financial planning methodologies into Morningstar’s Wealth Forecasting Engine (which historically was used to let retirement plan participants do their own basic financial/retirement planning projections), and its new Automated Portfolio Construction (APC) services, which means it’s not entirely clear whether the new planning tools will simply be an expansion of the services it already offers to plan sponsors, or an expansion into the competitive marketplace of financial planning software for advisors that is deeply integrated into Morningstar’s other tools (somewhat akin to how MyMoneyGuide is integrated to Schwab Intelligent Advisory, or eMoney Advisor is being built into Fidelity AMP). Stay tuned for more announcements from Morningstar on financial planning in the coming year?

Envestnet Is Using Yodlee To Finally Build The Real Future Of Financial Advice Software. For most of its history, the primary purpose of financial planning software has been to illustrate the accumulation and decumulation of assets throughout the client’s lifetime. Over the years, various modules have come and go to illustrate a subset of related products, from a capital needs analysis (for life insurance) to tax projections (when selling tax shelters or tax credits) to estate planning flowcharts (to fit life insurance into an ILIT). But the core has always remained projecting the accumulation of wealth for retirement, and the longevity of that wealth throughout retirement. Which makes sense, given that financial advisors are increasingly focused on managing their clients’ assets. Except the caveat is that long-term retirement projections don’t change very much from year to year, and certainly not month to month or day to day. Which means financially planning software doesn’t actually have much to say in the client relationship after the initial plan, and except for occasional and infrequent “plan updates” after several years has passed (or a major life event has occurred). Yet, by contrast, Personal Financial Management (PFM) software like Mint.com has a highly engaged user base, that logs in monthly, weekly, or even daily, to track their ongoing financial lives. Which means it’s only been a matter of time before a good PFM solution – focused on cash flow and spending, as the financial lifeblood of a household – would emerge for financial advisors. And after having acquired Yodlee back in 2015, Envestnet revealed at its Advisor Summit last month that it is finally building out a cash-flow-oriented PFM solution for financial advisors. The initial version will help clients budget monthly bills and show them trends in net worth over time, and next year the app will help clients see where all their spending is going every month, which in turn will be following by basic artificial intelligence capabilities to send clients chatbot messages with tips about how to improve their financial situation (e.g., tips on refinancing a credit card debt, or suggesting to the client that it’s time to call their advisor if the software detects they may have been laid off from their job). Given how asset-centric most advisors are today, giving advice on household cash flow may seem like a stretch, but the reality is that cash flow and spending guidance actually has the potential to provide a more immediate and tangible positive result for clients, allowing advisors to more effectively communicate not just their long-term value in accumulating towards retirement, but their ongoing year-to-year value proposition, too.

Apex Expanding Into RIA Custody, Even As Wealthfront Ditches The Platform. The world of independent RIA custody and clearing is dominated by a handful of major players – Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions – followed by a handful of smaller “second tier” custodians like SSG, TradePMR, Trust Company of America, and Scottrade Advisor Services. Yet the reality is that there’s another significant player, smaller than the largest but largest than most other second tier players: Apex Clearing. While not known in the RIA advisor community, it’s Apex Clearing and its robust set of APIs that allow most investment functions to occur entirely digitally, and thus formed the backbone of nearly the entire early robo-advisor movement, variously counting Betterment, Wealthfront, Personal Capital, Stash, Robinhood, and more, as builders on their platform. In fact, a key caveat of Apex Clearing is that while the company is known for being especially good and efficient (and low-cost) in its core custody and clearing capabilities, it doesn’t have the sophisticated modern interface of other RIA custodians, which means it must have an intermediary/middleware layer to fully bring its capabilities to market. But now, Apex is starting to appear as a new RIA custody option in the emergence of digital “robo-advisor-for-advisors” platforms, with the latest RobustWealth “BaseCAMP” solution offering Apex Clearing as an RIA custodian (along with Schwab and TD Ameritrade), after Vanare | Nest Egg (now AdvisorEngine) similarly announced an Apex option last year. Which means the competitive landscape for RIA custodians may soon heat up, as the capabilities of new “robo” platforms for advisors make it easier than ever to be multi-custodial, and for advisors to simply choose the lowest cost and most digitally-capable solution – where Apex appears to have an edge, and could give advisors a new way to squeeze their client costs even lower. Although ironically, even as Apex threatens to shake up the existing RIA custodian world with its low-cost digitally-advanced capabilities, Wealthfront recently announced that it was ditching Apex, opting instead to go with their own internally developed solution, as Wealthfront suggests that even Apex is itself still too reliant on the archaic infrastructure of the financial services system and hasn’t been able to keep up with the evolution of digital investment platforms in the past 6 years (which makes the traditional RIA custodians look even worse by comparison!).

Why Is Portfolio Performance Reporting Software So Expensive? Lots of Bad Data (Standards)! Portfolio accounting and performance software is one of the most expensive components of the advisor technology stack, and many advisory firms end out spending 3X, 5X, or even 10X the cost for investment software than they do for financial planning software, even for firms that are focused primarily on financial planning. Because if the firm manages or advises on assets, at all, it’s virtually always necessary to provide some kind of performance reporting, and there are just no cheap solutions. Recent newcomer Panoramix is aiming to make its mark by offering a substantially cheaper performance reporting solution – at “just” a $4,000 base fee – and has published an intriguing White Paper that shares the intimate details of exactly what it costs to launch performance reporting software, and why it’s so expensive. The answer, in a word, is “data”, and the fact that every financial institution tracks and reports data differently in its data feeds. As a result, bringing on a new data feed entails a substantial effort in data mapping (taking the custodian’s data feed and manipulating it to fit the format/layout that the performance reporting tools use), handling updates as the data feeds change (as custodians variously change/update their own feeds), and integrating third-party interfaces that help cross-reference and verify security pricing, security classifications, and more. In addition, one of the biggest ongoing challenges of performance reporting is manually fixing errors that don’t reconcile – as even if the error rate is just 1-in-1,000 accounts has an error every day, and each error costs just $100 of staff time to fix, then an advisor with 500 account downloads that occur 250 trading days per year at a 0.1% error rate will still incur a whopping $12,500/year in data reconciliation costs. Thus why many performance reporting solutions have $15,000+ minimums. Panoramix is aiming to differentiate itself – with a lower cost – by working with a smaller number of (ostensibly higher quality) financial institutions, and working to better automate the reconciliation process (to reduce, in the aggregate, the number of reconciliation errors that require expensive manual fixes). Nonetheless, the fundamental point remains: the reason that performance reporting software is so expensive is because, despite the fact that all custodians must fully reconcile their own accounts continuously to ensure proper valuations and account balances, the lack of data standards means there’s no consistent and stable way to transfer that information to third-party performance reporting solutions without incurring what are cumulatively very substantial reconciliation costs for every advisor.

Will Amazon’s Alexa Become A Financial Advisor Communication Tool? Amazon’s Alexa is a small device placed in your home that uses voice recognition to take audio commands, from telling you the weather forecast, to looking up information online, or even placing an order for dinner to be delivered. But now, some financial services providers are looking at whether Alexa might be an effective channel for financial advisors to communicate with their clients. The Wall Street Journal notes that in Europe, certain UBS Wealth Management clients will be able to ask Alexa various financial and economic questions, and hear a(n automated) response with the answer directly from UBS’ Chief Investment Office. And at the recent T3 Advisor Technology conference, eMoney Advisor demonstrated a proof-of-concept integration with Alexa that would allow the client to ask Alexa whether he/she was on track for retirement, and Alexa would respond with the current health of their financial plan. So far, the Alexa interface is for information only – the WSJ story specifically notes that UBS will not allow trades to be placed via Alexa, at least right now – but the trend, coupled with the rising availability of “Big Data”, raises the question of whether tools like Alexa will increasingly become an information delivery and communication tool as a part of the financial advisor’s value proposition. While making investment trades via Alexa may still be far off, it’s not hard to imagine Alexa reporting to a client whether they’re on track for their spending budget, or to schedule or confirm a meeting with the advisor, or even using the Amazon Echo Show as a way to conduct a quick video meeting with a client on a brief but pressing financial issue.

Is Medicare Planning The New Retiree Value-Add For Advisors? With growing pressure on financial advisors to both differentiate and justify the value proposition for their advisory fees, more and more financial advisors who work with retirees are looking to expand their retirement advice beyond “just” the portfolio alone. This has led to a boom in software solutions for making Social Security recommendations, with the rise of companies like SS Analyzer and Covisum’s Social Security Timing, as making the “right” decision on Social Security can have a significant financial impact, and tends to occur just as prospective retirees are looking to transition to retirement (and might be looking for a financial advisor). Now, the demand for tools to assist with complex retirement decisions is extending to Medicare planning as well. Raymond James just announced a major partnership with HPOne, which provides tools that help consumers navigate their Medicare choices. Another provider, i65, has developed a standalone tool specifically for financial planners to help walk their clients through Medicare timing choices. And for advisors who want to go even deeper and bolster their own personal knowledge, Horsesmouth has launched a “Savvy Medicare Planning for Boomers” educational program. The bottom line: the pressure is on for us as financial advisors to go beyond “just” retirement portfolios when providing advice to retirees, and technology providers are trying to step up and provide us tools that we can use to bolster those more specialized areas of advice.

Second Annual XYPN FinTech Competition Announced (With Submission Deadline Closing Soon!). Last year, the XY Planning Network announced its inaugural FinTech competition, specifically to support and celebrate up-and-coming technology for financial advisors to help us better and more efficiently serve clients (especially younger clients, where leveraging technology is crucial for both efficiency and the advisor value proposition). The first year’s competition featured a wide range of competitors, with finalists including financial planning software provider RightCapital, risk tolerance assessment tool Totum Wealth, financial assessment provider DataPoints, College Funding analytics provider EFC Plus, all-in-one advisor communication platform Ambitient, and the winner: advisor marketing automation provider Snappy Kraken. And now, as a part of its XYPN17 conference, the XY Planning Network is again running its second Advisor FinTech competition. Interested tech providers must offer an advisor technology solution that supports financial advisors delivering advice to Gen X and/or Gen Y clientele, and must have either launched in the last 12 months, have less than $1M in gross revenue, or be an existing company offering a substantially different and new product line. Finalists will receive a free pass to XYPN17, a free booth for the conference’s 500+ attendees, and the winner will receive further promotion on the XYPN Radio podcast, the Nerd’s Eye View blog, promotional video content from advisor tech guru Bill Winterberg, and additional trade publication media coverage. For those who are interested, the deadline to apply is June 15^th, and finalists will be notified by June 30^th, with the competition itself at the XYPN17 conference in Dallas on Wednesday, August 30^th. Interested companies can apply directly here.

For further coverage of AdvisorTech news, be certain to also check out Bill Winterberg’s FPPad, Joel Bruckenstein’s T3TechnologyHub, and Craig Iskowitz’ Wealth Management Today.

And if you’re an #AdvisorTech company who wants to submit a tech announcement for consideration in future issues, please submit to [email protected]!

So what do you think? Will more robo-advisor and other “tech” companies start acquiring independent RIAs? Is PFM software really the future of financial advice technology? Can Morningstar be a financial planning software competitor? Is Medicare planning software going to be the new “big thing”? Please share your thoughts in the comments below!